The government's consultation – published on 7 September 2026 – proposes a fundamental change to the way companies determine whether they can lawfully pay dividends.

As part of its wider Modernising Corporate Reporting consultation, the government is considering replacing the existing rules based on distributable profits and capital maintenance with a new solvency-based regime.

If implemented, the proposal would represent a significant change to UK company law and could affect how companies, directors, accountants and advisers approach dividend decisions.

The current position

Under the existing framework, a UK company generally cannot pay a dividend unless it has sufficient distributable profits to support the distribution.

A company may only make a distribution out of profits consisting of:

• accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less
• its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

A distribution is required to be justified by reference to the company’s:

• last annual accounts, or
• interim accounts, or
• where the distribution is proposed to be declared during the company’s first accounting reference period, or before any accounts have been circulated in respect of that period, it may be justified by reference to initial accounts.

If an interim dividend was paid based on financial data that was later found to be wrong, the payment is legally an unlawful (illegal) distribution under section 830 CA2006 if it exceeded actual distributable profits at the payment date.

Legality depends on what the data showed at the time of payment, but subsequent correction means the distributable profit did not actually exist. Shareholders must repay the money only if they knew or had reasonable grounds to believe the figures were wrong and the payment was unlawful when received under section 847 of CA2006.

Directors who authorised the payment without exercising reasonable care or proper reliance on adequate management accounts can be in breach of duty and personally liable to make good the shortfall to the company.  Normally, the unlawful payout is treated as a loan from the company to the recipient (such as a director's loan account) until repaid. Read the HMRC guidance.

A company’s articles of association then typically set out the process for paying dividends (see article 30 of the UK’s model articles for private companies limited by shares).

So-called ‘final’ dividends are usually paid annually after the annual accounts have been approved.

The articles typically (and the model articles do) provide:

• for the directors to recommend a dividend
• for the dividend to be declared by ordinary resolution (eg by vote at an AGM or written resolution)
• that the members cannot vote to pay more than the amount recommended by the directors. Articles also typically (and the model articles do) provide for the directors to pay ‘interim’ dividends at any time. The tests of lawfulness of a dividend need to be applied not only at the start of the process but up to the point at which the dividend becomes a legally binding liability on the company.

This occurs when:

• a final dividend is declared by the members (even if, as is usual, stated to be due at a later date); or
• at the point when an interim dividend is actually paid.

The company should keep appropriate records relating to the payments, eg evidence that the dividend was supported by relevant accounts and minutes of directors’ or shareholders’ meetings. Under tax legislation, the company must send to the shareholder (or the bank or building society if the dividend is paid into a bank or building society account) a certificate stating the amount of the dividend and the date of the payment.

This means that a company may have significant cash in its bank account but nevertheless be unable to pay a dividend if it does not have sufficient distributable reserves.

The current framework can therefore require companies and their advisers to undertake detailed analysis of historic profits, losses, reserves and other accounting adjustments before determining whether a proposed dividend is lawful.

Proposed position

The government is considering moving from the existing distributable-profits and capital-maintenance model to a solvency-based regime.

The consultation question in Annex D asks:

‘Do you support moving to a solvency model for determining the legality of dividends?’

Under the existing system, the central question is essentially whether the company has sufficient legally distributable profits. Under the proposed system, the emphasis would shift towards the company's financial position and ability to remain solvent and continue as a going concern.

This could make the dividend process more closely connected with the company's current and expected financial position.

For example, a company with significant cash resources but limited historic distributable reserves could potentially be treated differently under a solvency-based model than it is under the current rules.

However, this does not mean that companies would simply be free to distribute cash whenever they wish. The precise safeguards, tests, evidence and director responsibilities would be critical to the operation of any new regime.

Greater responsibility for directors

One of the most important consequences of a solvency-based regime could be an increased emphasis on director judgement and responsibility.

The current system provides a relatively prescriptive legal framework for determining whether sufficient distributable profits exist.

A solvency test would inevitably require directors’ broad-level judgement of a range of financial information. They need to assess whether the company can demonstrate that the proposed distribution will not compromise its ability to remain a going concern.

Depending on the final design of the legislation, boards may need to consider matters such as:

• the company's current financial position
• expected cash flows
• future liabilities and commitments
• financing arrangements and covenant requirements
• foreseeable risks
• the effect of the proposed dividend on working capital
• the company's ability to continue as a going concern after the distribution.

The precise requirements have not yet been settled. This is one of the issues on which the government is seeking views through the consultation.

Impact on group companies

The proposed reform could be particularly relevant to groups where dividends are routinely paid between subsidiaries and parent companies.

Under the existing regime, the availability of distributable profits can create practical difficulties when cash exists at subsidiary level but the relevant legal reserves do not align neatly with the intended distribution.

A solvency-based framework could potentially reduce some of these complexities.

However, group structures also introduce additional considerations. Directors would need to understand the financial position of the individual company making the distribution, rather than simply relying on the financial strength of the wider group.

The final legislation and guidance will therefore be important in determining how the new regime would operate within corporate groups.

Share buybacks and other transactions

The implications may extend beyond ordinary dividends. The proposed move towards a solvency-based regime could also affect other corporate transactions that currently depend on distributable profits or capital-maintenance rules, including certain share buybacks and related corporate actions.

Protecting creditors

A key issue will be how creditor protection is maintained. The existing distributable-profits framework provides a legal restriction on the circumstances in which value can be returned to shareholders.

Replacing that restriction with a solvency test raises questions about the appropriate safeguards.

What does this mean for accountants and advisers?

The proposed reform could change the role of professional advisers in the dividend process. Moving from establishing the distributable reserves amount towards assessing and documenting the financial consequences of the proposed distribution, advisers are going to be much more involved in:

• cash-flow forecasting
• going-concern assessments
• management accounts
• financial projections
• board documentation
• evidence supporting directors' decisions.

Members should place particular emphasis on ensuring that adequate documentary evidence is retained to support the directors’ decision to declare or recommend a dividend. The board’s records should clearly demonstrate the basis on which the decision was reached, including evidence of the relevant management or interim accounts, cashflow and solvency considerations, and any other financial or commercial factors considered by the directors.

The board minutes should record not only the dividend approved but also the key information and considerations relied upon by the directors in reaching their decision for transparency.

What should companies consider now?

Although the proposed reforms are not yet law, companies that regularly pay dividends may wish to consider how a solvency-based framework could affect their existing processes.

In particular, boards and finance teams could review:

• how dividend decisions are currently documented
• the extent to which dividend approvals depend on detailed distributable-reserve calculations
• the quality and frequency of cash-flow forecasting
• how going-concern assessments are performed
• the information provided to directors before dividends are approved
• group dividend arrangements
• the interaction between dividends, financing arrangements and banking covenants.

It is a significant change, but not yet the law. It is important that businesses do not treat the proposed regime as an immediate change to the law. The wider consultation closes at 11.59pm on 30 November 2026, with the outcome expected to be published within six months of the consultation closing.

ACCA will be responding to the consultation and is keen to hear from members.

Send your comments and feedback on any practical issues you consider will help strengthen ACCA’s response on behalf of members and the accountancy profession in general to ukpolicy@accaglobal.com.

We would also appreciate any quick responses you might want to provide via this survey: Modernising corporate reporting.

Read further guidance on dividend and legality issues

Useful resources: MCR Consultation